Good day. Welcome to the SNC-Lavalin first quarter 2019 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Denis Jasmin. Please go ahead, sir.
Thank you. Good afternoon, everyone. Thank you for joining us today. With me today are Neil Bruce, President and Chief Executive Officer, Sylvain Girard, Executive Vice President and Chief Financial Officer. We also have with us today, Ian Edwards, our new Chief Operating Officer. Our earnings announcement was released this morning. We have posted a slide presentation on the investors section of our website. If you are not using today's webcast, please ensure to open the presentation as we will refer to it during this call. The recording of today's call and webcast will also be available on our website within 24 hours. Before we begin, I would like to ask everyone to limit themselves to two or three questions to ensure that all analysts have an opportunity to participate. You are welcome to return to the queue for any follow-up questions.
I would also like to draw your attention to slide two of the presentation. Information in this presentation and remarks made by the speakers today will contain statements about expected future events and financial results that are forward-looking and therefore subject to risks and uncertainties. These forward-looking statements represent our expectation as of to date. Accordingly are subject to change. We disclaim any obligation to update any forward-looking statements except as required by law. A description of the risk factors that may affect future results is contained in the company's MD&A, available on our website and in our filings with the Canadian Securities Administrators. During today's call, we will also discuss certain non-IFRS financial numbers. You can find reconciliation of these numbers with comparable IFRS measures in the presentation and in our MD&A. With that, I will turn the conference over to Neil Bruce. Neil.
Thank you for joining us today. I think I'd be remiss if I did not start by acknowledging that the first quarter of 2019 was uniquely challenging for SNC-Lavalin. We took some reputational hits. This was not as a result of anything we did, but it was difficult nonetheless. I want to begin by thanking our 51,000 employees, our clients, our shareholders, and our business partners for their continued and steadfast support. It is because of you that I am convinced that we will emerge better and stronger in the very near future. Over the past quarter, we have begun to execute on a strategy led by our newly named COO, Ian Edwards, with three key focused areas: simplifying the business, focusing on capabilities where we excel, and growing our business responsibly.
All three of these objectives have the same goal, to strengthen our operational performance and ultimately enhance profitability and cash generation. This ongoing strategy is supported by a solid foundation, including a strong backlog of CAD 50.8 billion as of the end of March, including bookings of CAD 3.2 billion in Q1, representing a 17.2% increase year-over-year. A BBB investment grade credit rating, reiterated by rating agency DBRS in April. An agreement reached in April to sell 10.01% of Highway 407 ETR for CAD 3.25 billion. This will allow us to de-leverage the balance sheet and evaluate which capital allocation strategy will be the most accretive to shareholder value, while still retaining a stake in a cash flow-generating asset.
Before I go into further details about our strategy and objectives going forward, I will first spend some time reviewing our outlook and Q1 results, which Sylvain will discuss in more detail. Our first quarter results came in below expectations with an adjusted net loss from E&C of CAD 14.9 million, or CAD 0.08 per diluted share. This compares to an adjusted net income from E&C of CAD 89.5 million, or CAD 0.51 per diluted share in Q1 of 2018. The loss was largely attributable to resources. Specifically, we had challenges in the oil and gas sector, mainly due to a net unfavorable impact from reforecasts of certain major projects and delays in claim settlements, as well as ongoing tensions between Canada and Saudi Arabia. Of our new sectors, three of the four performed well. Our Engineering, Design and Project Management segment had another strong quarter, delivering CAD 80 million in EBIT.
Our nuclear and infrastructure, although down year-over-year, had good performance. Overall, we are maintaining our 2019 outlook, which includes the following targets: An adjusted EBITDA from E&C of CAD 900 million-CAD 950 million, an adjusted diluted EPS from E&C of CAD 2.00-CAD 2.20, and an adjusted consolidated diluted EPS of CAD 3.00-CAD 3.20. We are confident we can deliver on our 2019 goals for a number of reasons. In addition to our strong backlog, including CAD 3.2 billion in new bookings in Q1, we expect the resources segment EBIT, which now includes the company's mining and metallurgy and oil and gas subsegments, to turn positively in 2019 with a forecast 4%-6% margin. Higher segment EBIT from our infrastructure and nuclear segments compared to 2018, mainly due to a strong backlog and prospects list.
We are also focused on cost reduction as part of our strategy to simplify the business and drive efficiencies. We are planning to reduce overhead costs by CAD 250 million annually. We expect to realize just over CAD 100 million in savings this year. In January, we began exiting some 15 non-core countries, where we had identified approximately CAD 85 million in unprofitable revenue. Overall, given the challenges faced in Q1 2019, we expect a very modest recovery in adjusted diluted EPS from E&C for Q2 2019, with a more significant ramp-up in the second half of the year as the resources backlog is rebuilt. We begin to see the impact of the cost reduction program. I'd like to now spend some time talking about our new strategy and structure. As I mentioned off the top, the company has faced some unique challenges in recent months.
The leadership team made an immediate decision to recalibrate and take action by focusing on five key objectives. Delivery and project oversight, simplification of sectors and business model, improved capital allocation strategy and cash generation, delivering on our financial objectives, and protecting and creating value for all of our stakeholders. We began work right away. In fact, it was a continuation of the work that we did at the beginning of the year in January, starting with restructuring the business in order to focus on what we do best and where we do it most profitably with the least risk. A substantial initial effort, of course, in legacy mining and oil and gas, addressing the project issues and identifying the areas for large efficiencies to increase competitiveness while ensuring delivery. On March 28th, we consolidated our operating segments down from seven to four.
EDPM replicating the success and high performance of our Atkins business. Resources which brings together all of our mining and oil and gas capabilities. Infrastructure, which will focus on projects in North America, a cornerstone of our business, particularly in light rail transit systems. Nuclear, an important high-performing business for us, with a focus on refurbishments and decommissioning in Canada, the U.S., and the U.K. As part of this effort, we are focusing on our core geographies and, as mentioned, reducing our presence in markets where we have subscale operations, including exiting some 15 countries. Going forward, we have identified our core growth regions as Canada, the U.S., the U.K., the Middle East, Hong Kong as a hub to Asia, and Australia.
Together, this restructuring and focus will allow further integration across the company, facilitating best practices and allowing for more effective oversight, especially in our EPC projects, which now will be carried out only in our resources and infrastructure sectors. To that end, we've created a new project oversight function, which is part of the executive committee and is tasked with ensuring operational consistency as well as assessing risk. The oversight function will enhance our ability to foresee and fix project-related issues in a timely fashion and will be involved in both the winning and delivery phases of the business. Going forward, our business will be structured and aligned with generating sustainable and profitable growth. We will focus on building the business where we have a strong market position, clear capabilities in known geographies, and with clients with whom we have strong relationships.
To conclude, we have a clear vision for the business. The company is on a sound financial footing and has a robust business pipeline, including many projects around the world and some of the largest contracts in North America. Importantly, these solid business fundamentals are anchored in our corporate values, integrity, safety, collaboration, and innovation, which forms the bedrock of who we are and how we operate. I'm extremely proud of the fact that SNC-Lavalin was recognized earlier this year for its best-in-class corporate ethics and compliance program by the Ethisphere Institute. This recognition, along with our growing global footprint and work on some of the world's largest and most complex projects, is a testament to SNC-Lavalin's position as one of the world's leading fully integrated professional services and project management companies. Thank you.
With that, I'll turn the call over to Sylvain to go over our financial results.
Thank you, Neil. Good afternoon, everyone. Before I get into the financial details, I would like to explain the changes that we made to our segment disclosure, which took effect on January 1st. Please turn to slide five. The segment disclosure note in the company's financial statement reflects the new simplified, consolidated operating structure recently announced by the company and the restated comparable numbers. The company believes that this new organizational structure will position it for further improving project delivery, as well as driving responsible growth and more consistent cash flow generation. First, we have regrouped certain segments. Mining and metallurgy and oil and gas segments are now merged and called resources. We also included the Clean Power and thermal power segments into infrastructure.
Additionally, we transferred the infrastructure engineering business unit from infrastructure to EDPM in order to bring like businesses together and allow EDPM's best practices to transfer to infrastructure engineering. Therefore, we now have simplified our structure to four segments: EDPM, infrastructure, nuclear, and resources. The other change we implemented was to transfer certain corporate G&A costs to the segment EBIT. These costs mainly relate to the different centers of excellence we have around the world that are now allocated to the operating businesses instead of corporate. Lastly, the segment EBIT now includes a contribution attributable to non-controlling interest before income taxes to better reflect the overall performance of each reportable segment. This means that revenues and segment EBIT is at 100%, no matter the percentage we may own for a specific project or subsidiary.
For example, Linxon and the CDI joint venture, for which we own 51% and 40% respectively, are now presented in the segmented note at 100%. For your information and ease of comparison, we have included in the appendix of this presentation on slides 13 and 14, the comparative restated numbers for the new segment disclosure by quarter and for the full year 2018. These changes have no impact on the overall EBIT of the company. Turning to slide six. In addition to implementing the simplified operating structure, the company has launched a major simplification and cost reduction program. The objective of this program is to reduce the company's overhead cost structure by CAD 250 million annually. The company expects to realize just over CAD 100 million of such savings during the course of 2019.
For Q1 2019, we have recorded an adjusted net loss from E&C of CAD 15 million, compared to net income of CAD 89 million in Q1 2018. This loss was mainly due to a lower total segment EBIT, partially offset by a positive corporate SG&A. Total segment EBIT for Q1 2019 amounted to CAD 99 million, compared to CAD 229 million in Q1 2018, as 2019 included a negative segment EBIT of CAD 61 million in resources. This was mainly due to a net unfavorable impact from reforecast on certain major oil and gas and mining and metallurgy projects and delay in claim settlements. Nuclear and infrastructure recorded a lower segment EBIT compared to Q1 2018, while the EDPM segment had another strong quarter. Total corporate SG&A expenses amounted to CAD 6 million for the quarter, compared to CAD 25 million in Q1 2018.
The corporate SG&A from E&C was positive CAD 1.7 million in Q1 2019, due in part to a lower amount of benefits, including the reversal of some corporate incentives and revisions of certain estimates. These reversals were mainly necessary due to the lower share price as of March 31st, 2019. Total revenues for Q1 2019 amounted to CAD 2.4 billion and were in line with Q1 2018, as the decrease in resources was offset by the increase in EDPM. Our Q1 2019 revenues were composed of 75% of reimbursable and engineering service contracts and 25% of EPC fixed price contracts, same as in Q1 2018. Our backlog was CAD 15.8 billion at the end of March, with a book-to-bill ratio of 1.4 for the first quarter.
Our bookings for the quarter were CAD 3.2 billion, which includes CAD 1.6 billion in infrastructure, mainly due to the booking of the Trillium Ottawa project, CAD 0.9 billion in EDPM, and CAD 0.5 billion in resources. Our backlog remained heavily weighted in reimbursable and engineering services contracts with 72% versus 28% for EPC fixed price contracts. I will shortly get into the liquidity and debt ratios in more details. Now, moving to slide seven. I won't spend too much time on this slide. We see the negative segment EBIT in resources, which was just explained. Nuclear had a lower segment EBIT due to a less favorable business mix and higher forecasted costs on a project nearing completion in Canada. Infrastructure also had a lower segment EBIT, principally resulting from lower profitability on projects from the former Clean Power. Lastly, the EDPM segment had another strong quarter with a CAD 80 million segment EBIT.
Turning to slide eight. In line with expectations, the operating cash flows for the first quarter of 2019 were negative, totaling CAD 249 million. This was mainly due to disbursements on the Codelco project, timing of milestone payments on large infrastructure projects such as Eglinton, New Champlain Bridge, Ottawa LRT, and the REM, and certain delays in claim settlements on some oil and gas projects. If we compare to Q1 2018, the increase in cash outflows was mainly driven by a lower EBIT from E&C segments, an increase in restructuring costs, interest paid, and a lower income tax received, partially offset by lower working capital requirements on certain major projects. Note that a significant cash consumption related to Q4 revised reforecasted costs on the Codelco mining projects will continue to occur in Q2 2019 as we complete the project closeout.
For reference, the net impact so far on the termination of this project is a slight positive versus the year-end position for both project EBIT and cash flows. This may evolve as the settlement processes continue with our subcontractors and the client. Moving to slide nine. Despite the challenges faced in 2018 and in Q1 2019, we have been able to maintain our investment-grade rating as confirmed by both S&P and DBRS, thanks to solid concession assets, our cost reduction initiatives, and the diversification of our activities. Nevertheless, we believe it is important that we reduce our leverage to a more sustainable level. As such, 2019 will be a year of further focus on strengthening the company's balance sheet.
As at March 31st, 2019, the company had a net recourse debt of CAD 2 billion and CAD 1 billion of limited recourse debt, as well as CAD 1.6 billion in unused capacity under our CAD 2.6 billion committed revolving credit facility. The net recourse debt-to-EBITDA ratio, calculated according with the term of the company's credit agreement as amended, was 3.9 times. I remind you that our covenant and ratio calculation with our lenders has been temporarily increased to four times, and that the Q4 forecasted loss on the mining metallurgy project is to be considered as a non-recurring item up to a maximum of CAD 310 million. I also remind you that we have taken some actions that are already having impact on strengthening our balance sheet. In February, we announced a reduction of our quarterly dividend, which allows us on an annual basis to retain approximately CAD 131 million of cash.
Last month, we also reached an agreement for the sale of a portion of our stake in Highway 407 ETR for proceeds that could reach CAD 3.25 billion, of which CAD 3 billion should be received in June. Should the Highway 407 ETR shareholder decide to exercise its right of first refusal, this would trigger a break fee charge of 2.5% payable to owners. As already disclosed, we anticipate using the net proceeds for the following purposes. First, to repay the recently amended CDPQ loan by approximately CAD 600 million. As a reminder, the term of the remaining CAD 400 million CDPQ loan are at 300 basis points above CDOR, which compares to 500 basis points above CDOR in the previous agreement.
Secondly, to substantially reduce our leverage by repaying two debentures reaching maturity with amounts of CAD 150 million and CAD 350 million, respectively, along with significantly paying down our revolving credit facility, thus further securing our investment-grade credit rating. Our long-term target is to have a gross recourse debt to adjusted EBITDA from E&C ratio in the range of 1.0 to 1.5 times, which we believe is consistent with our objective to maintain a BBB investment grade and also in line with our industry peers. As for the remainder of the proceeds, the company will continuously evaluate which capital allocation strategy would be the most accretive to shareholder value. It is important to understand that the company does not intend to use the proceeds to make any acquisitions, and it does not replace in any way our efforts to grow and improve our cash flows from operations.
Turning to my last slide 10. We are maintaining our guidance for 2019, note that given the challenges faced in Q1, we expect a very modest recovery in our adjusted diluted EPS from E&C for Q2 2019 and a more significant ramp up in the second half of the year as we rebuild our resources performance and start to see the impact of our cost reduction program. Upon the finalization of the Highway 407 transactions, we will adjust and reissue our guidance accordingly. This concludes my presentation. We can now open the line for questions. Thank you.
Thank you. If you would like to ask a question, please signal by pressing *1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press *1 to ask a question. We will pause for just a moment to allow everyone an opportunity to signal for questions. We have our first question from Yuri Lynk of Canaccord Genuity. Go ahead.
Wondering if you could provide a little more detail on the significant ramp up in EPS you're expecting in Q3 and Q4. I understand it is coming from the resource sector, given the results the last couple of quarters and where the backlog sits, just a little more help would be appreciated getting to the guidance.
Yeah. It is coming from a couple of areas. You are right in terms of the majority coming from the resources sector, also the effects of the CAD 100 million that we are confident that we will take out this year as part of the overall CAD 250 million run rate starting at the beginning of the next year.
Whilst EDPM performed well and Nuclear and Infrastructure performed okay in the first quarter, there is clearly room and expectation that we are going to continue to increase the margin and perform better in both of these sectors as well. It's really for three elements.
Right. We're talking about It's not just a ramp-up. You're going to have to do, on average, over CAD 1 a share in Q3 and Q4, which would be record quarters. Is there a claim that's coming back? Anything like that might help us get there?
There's not a specific claim, Yuri, that's coming back. We're always, obviously, working through settlements and claims, the driver is really the CAD 100 million. If you think of it as this is being executed at the moment, to generate the CAD 250 million annually, a lot of those actions have to take place in Q2 and early Q3, essentially. Those will pay back that CAD 100 million. A lot of it will be in that second half.
Okay. I guess two follow-up questions on the cost reduction program. Number one, what's it going to cost you in cash to achieve the CAD 250 million? Secondly, which segments are going to be downsized?
Yeah, I'll answer the first part of the question, and I'll pass it on to Ian for the second part. We're still assessing all the costs that will come from that. Right now, our estimate is in the range of CAD 125 million, which would be the charge as well as the cash impact into the year. Most of that is between Q2 and Q3.
Well, the cost, I guess, is a combination of a number of things. Clearly, we've moved the sectors from seven to four, which has a saving in just the sectors we've removed from management structures and functional support. We've also removed revenue out of 15 countries. We will be stopping unprofitable business in 15 countries. The support that was given to that, and they're global geographies. The new resources sector also forms quite a part of that in terms of cost out, because we've right-sized the mining part of the resources sector because we're no longer doing EPC projects in the mining part. We've also right-sized what was the oil and gas part of it to the business as we see it now.
There's a number of components, and clearly, we are in the process now of making those adjustments such that we get the benefit in the second half of the year.
Okay, guys. I'll get back in the queue. Thanks.
If you find that your question has been answered, you may remove yourself from the queue by pressing star two. We now have our next question from Benoit Poirier from Desjardins Bank. Please go ahead.
Yeah, good afternoon. Could you talk about the potential to receive a higher bid on the 407, and also how superior it must be in order to trigger a transaction?
No. Contractually, there's no possibility of that. We have a binding agreement with OMERS, that triggers binding agreements with our other shareholders from a ROFR, basically, that's it.
Okay.
There's no-
Okay. There's still a possibility the initial bidder can come back with a higher bid, Sylvain?
No. Not contractually.
Okay. Perfect. Could you talk a little bit also about the booking in Saudi Arabia and what kind of options are on the table right now given the issues in the region?
Yeah, I think it's important to understand that our activities in Saudi Arabia are not all oil and gas, although a large proportion is. What we're actually finding is that our business and our workload and our delivery and customer satisfaction around the work that we're doing in the other sectors is actually progressing reasonably well and is working well. In the oil and gas sector, which has been the area of most disruption, we continue to execute, obviously, on our backlog. We continue to potentially win some more work on existing contracts and framework agreements. We are having disappointing results around our bidding activities on completely new work. I think that sort of goes a little bit to the fundamentals of what Ian was talking about in terms of the resources sector.
We are in a place where there's a high degree of, not just anxiety, but there's a high degree of uncertainty within the resources sector. We are rightsizing the sector, SG&A, to the levels of our backlog as opposed to the levels of what we could potentially win into the future. If you look at the cost out of a minimum of CAD 100 million this year, I mean about 50% of it is in the resources sector. That's very much around making sure that we get back to a backlog revenues that, if we don't win, substantially more work will likely be down. The profitability that comes from that will be back to the profitability that we would expect from that sector, which is in the 5%, 6%, 7% area.
Okay. Could you talk maybe about the contribution on revenues and maybe backlog associated with the 15 countries you intend to diminish your exposure with?
Yeah. The revenues that were coming from those countries was about CAD 85 million. I don't have the backlog off the top of my head, but then the overall profitability of that was money losing.
Yeah. I mean, the backlog wouldn't be far away from the CAD 85 because it's services.
Okay.
Yeah, book and burn type work, and it was absolutely all unprofitable.
Okay. With respect to the IFRS 16, could you talk about the impact on the adjusted EPS for Quarry and see if there was any impact? Maybe about the free cash flow expectation in Q2 and maybe for the full year, given the current challenges.
IFRS 16 on EPS, the impact is negligible. Now, we've disclosed in the press release the impact it has on EBIT and EBITDA, you can see that. On EBIT, it's like five or six million CAD a quarter. You could see that there. From a cash flow perspective, I mean, we're still aiming for a positive operating cash flow for the year. There's obviously a little bit of drag from the restructuring spend that we talked about, and some areas within the sectors. Otherwise, we're still aiming for a positive contribution. The Q2 will be negative, just as the outflows on the mining project continues and that we ramp up on our cash flow generation elsewhere.
Okay, thank you. Thanks for the time.
We'll now take the next question from Derek Spronck of RBC. Please go ahead.
Yes. Thank you for taking my questions. Just wondering, when I look at accounts receivable and contract assets, it's around CAD 3.5 billion now, and that's up fairly substantially. Any color around that and perhaps reversal of those line items?
When we look at our cash flow performance, one of the dynamic that has surfaced, I guess towards the tail end of last year and in Q1, is around our large infrastructure projects. Which either through delays on the execution of it or reaching the milestones or, as we're working through with a client on settlements, is basically causing a cash drag. I'm talking about projects like Champlain, Ottawa LRT, for instance, that have been causing pressure on that. That's where you will see some of the WIP increase, essentially, or contract in progress.
Expectation is for those levels to start coming down over the next quarter?
Yeah. Absolutely. As we reach completion, as we finalize discussions with the client, and that's also a reason that explains our cash flow profile for the year, essentially with Q1 and Q2 being negative and then returning to positive in the second half.
Okay, great. Thanks, Sylvain. Just a couple on specific projects. Any updates around the ammonia plant in Oman? That looks like it should be coming to completion. The Champlain Bridge, and then finally the Codelco. Is the arbitration process still going forward?
Well, you want to talk about Codelco?
Sure, I can talk about Codelco. I mean, clearly we are demobilized from the project now, and we have a team now which is focused on the arbitration process. We don't expect that to be kind of come to a conclusion in the very short term. We're probably talking into next year and beyond, we are focused on recovering our losses from Codelco. No further activity actually happening there.
I think on the Champlain Bridge, there's been publicity around the fact that we're working really closely with our customer around both settlement of delays that we've had in the past, also in terms of the more positive piece around getting the bridge completed and opened to traffic. That is very much on schedule in terms of the end of June. The other project in the Middle East, I think, is progressing. We're looking at that in terms of the evaluation of it. I don't think there's anything more to add on that.
Okay. Thanks. Appreciate it. I'll turn it over.
We have our next question from Chris Murray from AltaCorp Capital. Please go ahead.
Thanks. Good afternoon. Going back to your guidance a little bit, trying to maybe understand this a little bit. Can you just talk a little bit about the timing? When I look at this 4%-6% segment EBIT, we've talked about a little bit, but I guess what I'm trying to understand is how much of that is essentially shedding that underperforming revenue and getting rid of it? How much is really coming from being able to ramp up some of this cost recovery in the overheads?
I think the biggest piece will be the cost reduction program.
Delivering CAD 100 million net is the biggest part of that. If you go through sector by sector, we expect three of the four sectors to continue to perform well and increase in terms of the profitability and the margin. Ultimately, the biggest piece of work that we are in the middle of, and we are intensifying, is the piece within resources, of which half of the cost out is very much in the resources piece. There's also making sure that we conclude on a number of projects that we have talked about in the past in terms of reaching financial settlement on that. It's a combination of these three things.
Should we be expecting that you've booked a lot of the costs associated with some of those projects already? Is it fair to think that there's anything baked into that 4-6 number that would just be revenue recognition coming back for payments?
Like I said earlier to a similar question, there are always settlements and claims that are expected in our forecast, some being recognized already, depending on our legal entitlement, and some not so. There's nothing big on its own or a single project on its own that's baked into Q2.
Yeah. I'm not trying to give any sort of excuse here. In terms of the resources sector, the resources sector, as you guys know, does not operate on a quarter-by-quarter basis, on a calendar quarter. These are long-term jobs. They had a mixture of things, they had a mixture of claims or even just valid change orders that we've got from clients that we need to go through, and we need to get a high degree of certainty in terms of being able to recognize that within revenue. Unfortunately, from a quarter-by-quarter phase, even though some of these are fairly well progressed, they don't meet the standard, therefore they may flip into the next quarter. We're certainly looking at the base level of trading to be in that margin that we talked about.
We also have a number of existing contracts that certainly we are working really hard in order to reach a financial close and settlement on in order to be able to recognize these revenues.
Okay. Just moving on, just looking at leverage. I guess the concern that a few of us may have is: Is there anything that could go wrong with the close of the 407 stake sale? You're right out at kind of the outside edge of your credit facility and credit limits. Is there any delay in either this right of first refusal or anything that could drag it past the end of Q2?
We don't see anything like that happening. We're pretty confident about our timeline here.
All right. The expectation is that you'd receive the cash in June and be able to bring leverage down pretty quickly after that?
Yep. Absolutely.
Okay. All right. Thank you.
We have our next question from Devin Dodge of BMO Capital Markets. Please go ahead.
Hey, thanks. Good afternoon. Can you help us understand the margin reduction that we saw in the nuclear business in Q1? This business is primarily cost plus, the margin performance has been consistently in the double digits. It was a bit surprising for us to see some margin compression there. Any color you have would be helpful.
Well, I think in nuclear, effectively there was two things. One was a slow ramp-up in the beginning of the year in terms of overall contribution, there was also one piece of work which was executed under a combined risk and reward, a reimbursable with a risk and reward piece where we actually took the risk with our JV partner. From that perspective, there was a one-off negative in the quarter, in addition to the fact that there was a slow buildup. We do expect that in Q2, three and four, that will completely reverse.
Okay. That's helpful. Maybe just switching over to the resources sector, how should we be thinking about top-line expectations there, just given all the moving parts? It seems like revenue's kind of stabilized at around CAD 600 million a quarter. Is that a good way to think about it going forward?
Yeah. I think it is, but I think what needs to get factored in there and what's become very apparent to ourselves and Ian and the team is that, we don't want to be in a position where we are too reliant on future bids and future revenues. We want to right-size the business so that we are very confident that we can deliver the margin off the backlog that we currently have booked, additional work that we either get from call-off contracts or additional work that we win is effectively in addition to that.
Okay. One last one, just switching to the EDPM segment. Revenue growth, it looked like it was about double digit. Can you give us a sense for what the organic growth was? How much was FX? That was a pretty strong result. Any color would be helpful.
Let us dig that up. Eric, I don't have right off the top of my head, but just one second. Yeah, just hold on. We'll come back to that, if you don't mind.
Sure. I'll turn it over. Thank you.
Thanks.
We will have our next question from Maxim Sytchev of National Bank Financial. Please go ahead.
Hi, good afternoon.
Hi.
Question on, I guess, legacy oil and gas, because correct me if I'm wrong, I thought 65% of what you guys did was outside of Saudi Arabia. That part of the business, is that actually EBITDA positive right now? I mean, is it all just Saudi right now, which is negatively impacting the results, I guess? That's the question.
No. I don't think it's just Saudi. In terms of the business overall, the SG&A is clearly oversized for the amount of work that we've got booked and firm globally. What we're trying to do in terms of the cost reduction exercise is make sure that we are right-sizing, working on the basis that this is all we're going to have, and anything from that is going to be dealt with on a project-by-project basis and therefore accretive to the whole thing. No, it's not just Saudi. It's our global oil and gas business.
Okay. I guess the commitment to doing EPC work, Neil, in the resources space, is this something that the clients kind of insist on, or what is the rationale for that?
It is Ian. The rationale really is around our capability. We feel that in North America and the Middle East, we have a strong capability of carrying out midstream/downstream medium-sized EPC projects. Also in the resources sector, some of our EPC projects are not actually lump sum. They are more on a reimbursable rate basis. Albeit you are still performing against rates, they are of a slightly lesser risk than a traditional EPC lump sum project. It is really around capability, clients, and a slight modification to the EPC model.
Right. Just again, the performance has been lumpy, right? I presume that the bulk of that is coming from those EPC-type contracts, right?
Yes, they are. Maxim, I think where you have got big lumpy contracts like that, within our contracts, generally, we have always got obligations to continue to execute and perform the work, even though the client may be changing the scope. From that perspective, if we cannot get the changes in scope completely detailed, completely agreed, or to a high degree of certainty agreed with the customer, then we clearly recognize the cost but do not recognize the revenue. That is where within that sector, historically, it has tended to be a bit lumpy. Part of what we are doing in terms of when Ian is talking about the responsible growth, we have got a big desire not just to reduce the lump sum work, but we are looking as well to eliminate the type of contracts that typically would make our-
Yeah
our results lumpy. We do understand that when we have these lumpy contracts in there, then it is difficult for analyst investors to actually understand exactly what is going on. We are looking to take the lumpy contracts in terms of that format out of our workspace going forward.
Right. In the resources space, again, Neil, in terms of do you have to win new projects to be able to hit the numbers in the back half? Just trying to see how much of a risk if you're not successful in terms of getting some of these projects in the door in the back half of the year.
Are you talking about Sorry, did you say in the resources or generally?
In the resources, yeah.
In resources, the big objective here, which is completely within our control, is we need to get half of the cost, half of the CAD 100 million delivered this year in resources. That, together with the orders on hand and the call of contracts that we've got, will give us a high degree of confidence that we can deliver on that in the second half.
Okay. Last question, can you maybe talk about the balance between, obviously, a lot of effort on SG&A savings and the improved project oversight, the cost-benefit analysis around maybe stretching too thin of trying to do both things at the same time, maybe any commentary there, please?
Yeah, I don't see them as being contradictory to each other, although it might sound that way. The reason that I say that is we are moving from seven sectors to four, and we are putting our EPC business lines into two sectors. In effect, the oversight that's necessary to look at where the risk is in the business is far more simplified than it was. We feel that we can effectively oversee those with the new oversight group without significantly increasing the SG&A. Where the SG&A is coming out in other parts of the overhead is exactly what I said before in the simplification in the way we approach BD, the way we collaborate and taking out geographies, et cetera.
Yeah. We are increasing the costs in terms of the oversight. That's the new positions, it's new capabilities, enhancing all of that. They're all additional costs. Ultimately, we're also taking out a lot of costs in order to then reach the net CAD 250 million. This is not just all about cost out, it's also about.
Yeah
Repurposing and reapplying some of our spend to the areas that we believe will give us the best results.
Yeah.
Okay. Thank you very much.
We now have a question from Michael Tupholme. Please go ahead.
Thanks. Good afternoon. On slide nine of the presentation, you presented details for a long-term target leverage ratio of one to one and a half times gross recourse debt to adjusted EBITDA from E&C. We think about that, should we be thinking about the E&C EBITDA including the IFRS 16 benefit, so therefore the higher EBITDA number? Is this pre-IFRS 16 EBITDA?
This is post. This is the EBITDA we report. Use the EBITDA we report.
Okay. Then you provided some information about the expected use of proceeds from the 407 sale. I'm just wondering, the term facility, is there any need or intention to repay that as well?
Not at the moment.
Okay. There's nothing in the 407 sale or in your bank agreements with the 407 sale that is triggering a need to repay that?
Well, there are different rules, given the amounts involved and all that, I think we can leave that loan outstanding.
Okay. You've been asked about the resources segment a few times, but I just wanted to revisit it a little bit. In the MD&A, there's reference to a net unfavorable impact from reforecasts on certain major oil and gas and mining and metallurgy projects. The oil and gas projects that experienced those favorable reforecasts, are those new issues, or are these extensions of something that you were experiencing in prior quarters?
Without going through the absolute detail of it, which we clearly can't do, it's typically, generally, an extension of what we have had over the last few quarters. They probably fall into three buckets. There's clearly performance issues where we need to acknowledge that we performed badly, and therefore, you just need to recognize that. There's the piece where it's a delay in terms of ongoing long-term discussions with customers on large contracts where we've had large scope increases, and we're trying to get that to a conclusion and ultimately to then recognize the revenue and obviously collect the cash. There are some which we think are a bit more of a legal claim perspective, where we are pursuing that, and these are all well progressed. It does tend to be within these three areas. It's not something that is new.
This has been a phenomenon for quite a while, and generally, we've had a reasonable degree of success historically in being able to resolve some of these.
Okay. No, that's helpful. Just as we look forward, though, thinking about your expectation for a meaningful improvement in resources in the second half, and I understand that a part of that comes down to the implementation of the cost savings, which will benefit that segment. As far as the risk that there's any ongoing issues from some of the things you just spoke about, how comfortable are you that by the time we get to the second half, these projects are going to be done, and you're not going to be experiencing these kinds of issues?
Well, again, there's a mix because we've got a whole range of call-off contracts. We've got some contracts that are coming to completion, and then we've got some contracts that are pretty long-term, sort of ongoing. That goes back to my point earlier, where Ian and the guys really, in terms of looking at the scope of what we bid and take in the backlog in the future is not just about whether it's lump sum or reimbursable. It's also a very keen eye on, would this semi-reimbursable unit rate contract with this customer, with these terms and conditions, provide us with a high degree of risk that this is going to end up in a lumpy contract. It might end up okay at the end, but we're very aware of the fact that these lumpy contracts don't do anything in terms of our building confidence in the marketplace.
I think we've got to look really hard before we take these on and start to remove some of these.
Okay. Just to clarify, when you talk about a 4%-6% segment EBIT margin for Resources, I guess, in the outlook section of the press release, is that your expectation for the margin you believe you can deliver on a full-year 2019 basis?
Yeah.
That's a full year.
Correct.
Just lastly, when you announced the last set of quarterly results for the full year 2018 results, there was mention in the filings about the formation of a special committee to protect shareholder value. I think you were asked about this on the last call. Just wondering if there's been any further developments. If you can just comment on if there's any update or what sort of things they may be doing or looking at, if any different from last quarter.
Yeah, that was formed. It's fully populated. We have the advisors working on various options. It's not just about protecting. There's a high degree of focus on generating additional value in terms of what the various options are. Again, unfortunately, in terms of being really specific, that's something that is confidential, really, until we clearly conclude on what the best option is going forward. In terms of a general update, that is very well progressed, and there's been a huge amount of work gone into that in the last five months.
Okay. Sorry, just one other thing I thought about here. Any update on the court proceedings as it relates to the outstanding charges? Any timing updates there?
We don't know for certain whether it's going to end up with a decision. The next key date really, in terms of the preliminary inquiry, is the end of May. I think it's the 29th. It's the end of May. Some time has been booked there. There could be a decision at that point in terms of what happens next or a further delay. We don't know. The key date's the 29th of May.
Okay. Thank you.
We have our next question from Frederic Bastien of Raymond James. Please go ahead.
Good afternoon. I was wondering if you exclude Clean Power from the infrastructure segment. I was wondering how the actual division performed on a like-for-like basis. Did infrastructure see some growth?
No. Infrastructure was down year-on-year, even after you exclude Clean Power.
Plus the delays.
Part of that being the delays on the major projects that I mentioned earlier impacting cash as well.
Yeah.
Thanks. That's helpful. Can you speak to the leadership changes that you've implemented at EDPM as well as Capital? These are segments that have been performing relatively well, I was just curious as to why you needed to effect these changes.
In terms of Capital, I think the major change with Capital, because Capital clearly performing well, but we had a strategy where we looked at whether it was possible for Capital to effectively act as a business development arm for all of our operating sectors. Clearly, we did that for a couple of years, and we had modest success with it. It was sort of okay. Effectively, when we did the review, we felt that there was too much time and effort actually going into that for the return. Basically, we have moved back to Capital effectively focusing on supporting the operations more specifically within the P3 or PPP type arena principally in Canada, but the United States and possibly the U.K. From that perspective, we have consolidated that with principally our treasury and bank relationships and insurance functions under Stéphanie.
We realized some significant cost savings within that which have already been implemented. From that perspective, it's basically coming away from the BD option because basically it wasn't producing enough value and just being really clear about the core. On EDPM, that was not a choice. Nick, fantastic leader of that business, done a great job, was provided with an opportunity to be CEO of a completely different company in the U.K. We regret that Nick is leaving. However, we're very, very positive about the fact that Phil is incredibly capable and Phil sort of ran 60% of the EDPM business from a European base. From that perspective, we're sad, and we regret that Nick's leaving. We wish he stayed, but it provides an opportunity for a really talented guy to continue to grow. Yep.
Okay, thanks, Neil. I appreciate the color. Thank you.
Thank you.
Thank you.
Just for Devin, just one last thing. For Devin, on your question on organic growth, we'll come back to you on that. The effects variance that I have on hand is actually versus budget, which is not that significant. I just want to make sure on the prior year basis, it's also consistent with that. We'll come back to you. Apologies for that.
It appears there are no further questions at this time. Monsieur Denis Jasmin, I'd like to turn the conference back to you for any additional or closing remarks.
Thank you very much for joining us today. If you have any questions, please don't hesitate to give me a call. Thank you very much and have a great afternoon. Thank you. Bye-bye.